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Dos and Don’ts when drawing up lease agreements for commercial property

Taking into account the current situation, the following article includes practice-oriented remarks concerning the conclusion of lease agreements for commercial areas.

Context

We have noticed lately a strong tendency among our clients to extend their existing commercial properties. The premises needed to this end are leased rather than bought – even when the premises don’t yet exist but will be built according to the lessee’s plans (built-to-suit lease). Such lease agreements are signed in practice on a medium- or long-term basis.

Despite the high value of the leases, the parties often fail to verify the legal status of the leased premises or to stipulate the exact rights and duties of the parties in the agreement. Since this can have significant legal and financial consequences, here are some important ‘Dos and Don’ts’ to bear in mind when drawing up lease agreements:

Do: Verify the legal status

We strongly recommend that the lessee makes a basic verification of the legal status of the leased premises. Check that the leased property is legally owned by the lessor, that it has been entered in the land register, that it is not burdened with rights of a third party, and that it has access to a public road.

It is all too common to discover that the leased property has been mortgaged with a prohibition on selling or leasing (Rom. interdicţie de înstrăinare/închiriere). In this case, the approval of the mortgage creditor is required for the valid execution of the planned lease agreement; otherwise the contract may be annulled.

Don’t: Allow unclear provisions for rent indexation

Medium- or long-term lease agreements should include appropriate provisions on the indexation of rent. When wording such provisions, make sure that the indexation can involve both the increase and the decrease of the rent; the specific index for the rent increase/ decrease must also be clearly identified in the contract (i.e. a general reference to the harmonised index for consumer prices without specifying the relevant field for its application is not precise enough).

Do: Specify exit options for fixed-term lease agreements

Fixed-term lease agreements cannot be terminated upon convenience either by the lessor or by the lessee (Rom. denunţare unilaterală) unless the right to do so is expressly stipulated in the contract. The terms and conditions of the exit option (if necessary, the minimum term after which the option can be exercised, the notice period, the contractual penalties in case of early termination etc.) must be clearly defined to avoid possible conflicts between the parties when applying them.

The lessee must specify the lessor’s responsibilities clearly and thoroughly in a lease contract for a built-to-suit project. For example, the contract should specify that the lessor is responsible for obtaining the building permit, executing the construction works, entering the building in the land register, obtaining the necessary fire protection permit, etc. These duties must be fulfilled before handing the property over to the lessee, given that the latter is not allowed to use the leased premises without a fire protection permit (and should thus not have to pay rent prior to the issuance of this permit).

Do: Insist on sufficient warranties from the Lessor and adequate sanctions

Since lease agreements for commercial premises are usually drawn up on a medium- or long-term basis, and the use of the property by the lessee can be disrupted for various reasons, we recommend that the contract specifies sufficient representations and warranties of the lessor. These statements should ensure the uninterrupted use of the property by the lessee. If the statements prove inaccurate, the contract must provide appropriate sanctions (for example contractual penalties, the right to rectification, the suspension of the rent payment or, if necessary, termination for good cause – Rom. reziliere unilaterală).

Conclusion

Medium- and long-term lease agreements for commercial properties can be a useful alternative to purchase. Given the high contract value and the fundamental significance for the business (especially in case of built-to-suit leased premises, which are customised for the lessee and therefore quite difficult to reassign), the lease agreements are of great importance. They must therefore be drawn up carefully, placing strong emphasis on details to protect both the interests of the lessor and of the lessee. The legal status of the property must be verified from the very beginning to create the conditions for an effective execution of the contract.